Answers:
First, note, many of the answers make no sense. For example, with monetary policy, if you increase the money supply you’re trying to lower interest rates to stimulate the economy (answer “b”). So increasing the money supply and increasing interest rate targets (answer “a”) makes no sense. Likewise, answer “d” for monetary policy makes no sense.
For fiscal policy, you want to either increase spending and lower taxes (and thus increase the deficit) to stimulate the economy (answer “d”) or the opposite: decrease spending and raise taxes (and thus reduce the deficit) to dampen the economy (answer “e”). This means for fiscal policy, answers “a”, “b”, and “c” have contradictory elements.
1) A wave of optimism boosts household consumption. If the Fed were to engage in stabilization (DASK) policy, the Fed should
c.decrease the money supply and increase interest rate targets
Since optimism is boosting AD, the government would counter that by trying to reduce AD.
2) Continuing with the previous question, if policy makers were to use fiscal policy to actively stabilize (a DASK policy) the economy, then policy makers should
e.raise taxes, decrease spending, and reduce the deficit
In the previous question, the government was trying to counter a boost to the economy. Thus the government needs to dampen the economy. Tax more, spend less to slow the economy down. This will reduce the deficit (and possibly run a surplus)
3) Foreigners decrease their tastes for domestically produced goods and net exports fall. If the Fed were to engage in stabilization (DASK) policy, the Fed should
b.increase the money supply and decrease interest rate targets
A decrease in NX means AD is decreasing. The governments needs to counter that by pushing AD up.
4) Continuing with the previous question, if policy makers were to use fiscal policy to actively stabilize (a DASK policy) the economy, then policy makers should
d.lower taxes, increase spending, and increase the deficit
The government is trying to stimulate the economy to counter the fall in AD (from a fall in NX). Spend more, tax less (and thus expand the deficit).
5) Investor sentiments drop as entrepreneurs become pessimistic about the future economy. If the Fed were to engage in stabilization (DASK) policy, the Fed should
b.increase the money supply and decrease interest rate targets
A decrease in I means AD is decreasing. The governments needs to counter that by pushing AD up. This question is the same as #3 except it is I decreasing instead of NX.
6) Continuing with the previous question, if policy makers were to use fiscal policy to actively stabilize (a DASK policy) the economy, then policy makers should
d.lower taxes, increase spending, and increase the deficit
Just like question #4, the government needs to stimulate the economy. Spend more, tax less (and thus expand the deficit).
7) Investor sentiments drop as entrepreneurs become pessimistic about the future economy. If the government were to follow a laissez faire policy, it would
e.do nothing
Laissez faire policy means to do nothing.